BackUp Offers: Good or Bad Idea?

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You’ve been searching for a new home and when you finally find the home of your dreams, it already has a pending status — bummer! While you may want to drown in your sorrows, you may be surprised to know you’re still not entirely at a loss. If you have a savvy Realtor, they can help position you to have a legitimate chance to still get your hands on the home of your dreams through a strategy known as “backup offers.”

Real estate transactions involve many steps, and there are a variety of things that can happen once a home goes under contract that can make a sale fall through — inspections, appraisals, financing etc. In the event that the current deal falls apart, the home is typically re-listed on the market with the status of “Back on the Market;” meaning it is open again for offers. Here’s our take on how to navigate backup offers.

Backup Offer Tips For Buyers and Sellers

Tips for Sellers:

If you’re a seller, it is almost never a bad idea to continue having the property shown as you could entertain “backup offers” as a safety net in case your current contract falls apart. This also gives you great negotiating leverage during the inspection period in the event the current buyer asks for a laundry list of repairs. If they know you have a second contract waiting in the wings, they may be less aggressive on their requests.

Tips for Buyers:

If you’re a buyer, being able to solidify a backup contract or 2nd position, can be a game-changer since the home would automatically revert to you in the event the current sale falls apart. This means you would not have to compete with other buyers on the open market since the home does not go to “Back on the Market” status.

How Do Backup Offers Actually Work?

A backup offer occurs when a seller already has a buyer under contract but accepts another contract with a second buyer. This second contract does not go into effect unless the first contract falls through (therefore the 2nd contract is contingent upon release of the 1st.) If the contract with the original buyer falls through, the second buyer then automatically goes under contract to purchase the property…the negotiating has already been done.

So even if a property’s listing status is “pending” or “under contract,” then it is possible that the seller is still accepting backup offers — so don’t hesitate to have your agent check with the seller or listing agent.

Most buyers shy away from backup offers because their agent has not fully explained how they actually work, and most agents shy away from backup offers because they feel like it is extra work on their part.

What If I Find Another Home?

Just as the old adage says “there is more than one way to skin a cat” so it is with backup offers. There is actually more than just one way to execute a backup contract. Here at Covenant, we can typically provide our buyers with an “exit clause” that would allow them to withdraw their backup contract within 24 hours of finding another home that suits their needs.

Essentially, what the buyer is doing is reserving their spot in line with one home as they can continue to shop for another home. In the event they find something else, they can withdraw their contract given adequate notice (24 hours is common) before their backup contract moves into first place. Sweeeet!

Sure — this requires extra effort on your agent’s behalf, but they should be willing to go out of their way to ensure you get the right home!

Why Would a Buyer Terminate a Contract?

Buyers terminate contracts every day — roughly as many as 10-20% of deals in the Louisville market fall apart any given year, so don’t give up easily! Issues uncovered during the home inspection, or the inability to secure financing, are common reasons why a buyer would terminate a contract.

If you’ve made a backup offer on a property and the original buyer backs-out, there’s a chance that the reason the original buyer backed out could impact your decision to purchase the home. For example, if the home inspection revealed substantial mold issues, you might not want to proceed with the sale either, so it’s worth finding out why the first contract was terminated. Here in Kentucky, the seller would be required to update the disclosures in the event an issue or defect were found.

All in all, backup offers and contracts can be a great strategy for securing your dream home especially in today’s market where homes are selling so quickly. Some buyers are submitting offers so quickly on homes for fear of missing out that they really didn’t think things through all the way, and eventually get buyer’s remorse. Make sure you have an agent that is not afraid to utilize backup offers whether your buying or selling and is willing to walk you through that process.